United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20742

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Sydenham Commercial Property Ltd v Revenue & Customs [2008] UKVAT V20742 (10 June 2008)

20742

Transfer of going concern; sale of heritable property held as an investment by private limited company to two individuals; exercise of option to tax; whether individuals intended to carry on similar business; no; Value Added Tax Act 1994 section 4, Schedule 9, Group 1; The Value Added Tax (Special Provisions) Order 1995; HMRC Notice 742A and 700/9; Appeal dismissed.

EDINBURGH TRIBUNAL CENTRE

SYDENHAM COMMERCIAL PROPERTY LTD Appellant(s)

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: (Chairman): J Gordon Reid, QC., F.C.I.Arb.,

(Members): James D Crerar, WS., NP

Ian M P Condie, CA

Sitting in Edinburgh on Monday 7 April and Friday 25 April 2008

for the Appellant(s) David Griffin, director of the Appellants

for the Respondents Julie Strachan, Shepherd+Wedderburn LLP

© CROWN COPYRIGHT 2008.
 


DECISION

Introduction

1. This appeal against a Notice of Assessment in the total sum of £59,661.40, concerns the sale of heritable property and the operation of the statutory provisions relating to the transfer of a going concern.
2. The Hearing took place at Edinburgh on 7^th and 25^th April 2008. The Appellants were represented by David Griffin, a director of the Appellants. He gave evidence and led the evidence of Manzoor Ahmed, one of the purchasers of the property in question, and Michael Rourke, a solicitor and partner of the firm Robert Thomas and Caplan, solicitors, Glasgow, who acted for the purchasers in the transaction. The Respondents led the evidence of William O'Pray a VAT assurance officer with HMRC. Each party also produced a bundle of documents. There was no dispute as to their authenticity, and where appropriate, their transmission and receipt.

Statutory Background

3. The supply by a person of assets of his business to a person to whom he transfers his business or part of his business as a going concern is treated as neither a supply of goods nor a supply of services if certain conditions are satisfied (the Value Added Tax Special Provisions) Order 1995 SI 1995 No 1268, Article 5). These conditions include (i) the use by the transferee of the assets in carrying on the same kind of business, (ii) the transferee is already or becomes a taxable person, and (iii) in relation to the transfer of heritable property, the transferee, before settlement, the transferee has made and notified an election to waive exemption under Schedule 10 of the 1994 Act (i.e. exercised the option to tax). The legislation is a little more complex but it is unnecessary in this appeal to discuss it in any further detail. HMRC are entitled to require further information about the election before it has statutory effect (1994 Act Schedule 10 paragraph 3(6) (b)). This gives HMRC an element of discretion See HMRC Notices 700/9 and 742A).

Issues

4. The Grounds of Appeal state that The Building in question was sold and purchased as a transfer of a going concern where no VAT is chargeable.

Facts

5. The Appellants are a property investment and letting company. The shareholders and directors are David Griffin and his wife. The Appellants are registered for the purposes of VAT. They owned premises known as the upper floor restaurant premises and flat at 154/156 High Street, Elgin ("the Property").
6. The Appellants acquired the landlord's interest in the Lease between HMV Fields (Elgin) Ltd and the firm of L.H. Lui and Partners; the Lease was entered into in 1986 for a period of 25 years from 15^th May 1985. The subjects are described as the first floor and top or attic floor at 154 High Street, Elgin. Despite discrepancies in numbering this is the Property referred to above. Nasir Mahmud and Assad Rasul acquired the tenant's interest and by Minute of Sub-Lease dated 2001 they sub-let the Property to Manzoor Ahmed from July 2001 until 14^th May 2010.
7. Manzoor Ahmed and others connected with him operated a restaurant business at the Property since at least 2001. The precise juridical basis of under which the restaurant has been operated there is not entirely clear.
8. In about April 2003, AL AH and another or possibly others trading as AL BAHAR TANDOORI the Property, applied to be registered for Value Added Tax. HMRC (more accurately, their predecessors) by letter dated 12/5/03 confirmed registration with effect from 6/4/03; the VAT registration number given was 813 717829. The entity registered was a partnership.
9. In about June 2003, the Appellants elected to waive exemption under Schedule 10, paragraph 2 of the 1994 Act, on subjects known as 154-158 High Street, Elgin, which included the Property.
10. Later that year, the Appellants agreed to sell and Manzoor Ahmed and Mohammed Sarwar agreed to buy the Property at the price of £325,000. Michael Rourke handled the transaction on behalf of the purchasers. He took instructions from Manzoor Ahmed. Messrs Ahmed and Sarwar have been clients of his firm since at least 1987. They have previously purchased various properties in Ayrshire.
11. The missives produced are incomplete. However from other correspondence it appears that the missives were constituted by letters dated 15/10/03 (produced), 14/1/04 (produced), 27/1/04, 23/3/04, 25/3/04, and two letters dated 31/3/04 (produced). However, parties were agreed that the price was exclusive of any Value Added Tax payable thereon and the following provision formed part of the contract of sale:-

"Both our clients [sc the seller] and your clients [sc the purchasers] shall use all reasonable endeavours to procure that the sale of the subjects of sale is deemed to be a transfer of business as at [sic] going concern for the purposes of..... Value Added Tax....to procure that no VAT shall be payable. It is understood that the purchase by your clients from our clients of the subjects of sale subject to the existing Lease and Sub-Lease of part of our client's property letting business [sic]. If it is deemed or decided by HM Customs & Excise that the sale does attract payment of VAT, no matter when such ruling or decision is made, then your clients will pay the VAT forthwith to our clients in exchange for a VAT invoice."

12. While missives were being negotiated, the parties' solicitors considered the VAT position. By letter dated 16/2/04 to the purchasers' solicitors, the Appellant's solicitors stated that they thought it would be necessary for the purchasers to be jointly registered for VAT if they were purchasing the subjects in their own individual names. They pointed out that the certificate which the purchasers' solicitors had sent them was in the name of "Al Ha". They also pointed out that it would be necessary for Ahmed and Sarwar to intimate their election to waive exemption prior to settlement.
13. By letter dated 24/2/04 to the purchasers' solicitors, the Appellant's solicitors sought confirmation that the purchasers intended to continue the Lease and Sub-Lease after settlement.
14. The purchasers' solicitors made some enquiries. They sent an "Option to Tax" form to the VAT Office on or about 24/2/04. The notification ran in the name of Al Bahar Tandoori and Manswar Ahmed and Mohammed Sarwar, the partners thereof. The address given was 156 High Street Elgin and the proposed effective date for the Option to Tax was specified as 24/2/04. The VAT number given was the same number as the VAT number specified in paragraph 8 above. The form was signed by Mr Rourke as agent. HMRC did not respond to this letter until 24^th March 2004. They did not reply to the letter, but instead wrote to Al Ha T/A Al Bahar Tandoori, at 156 High Street. Who Al Ha is or was is something of a mystery. However, one of the productions is a pro forma Advice of Registration letter from HMRC to Al AH Al Bahar Tandoori, at 156 High Street, Elgin. Whether AL AH and Al Ha are one and the same person is unknown but quite possible.
15. At some stage before the settlement of the transaction, Mr Rourke advised his clients to discuss the VAT position with their accountant. Whether they did so and if so what advice the accountant gave, if any, is all unknown. Mr Rourke also contacted the VAT Advice Office and asked them to send out forms which they appear to have done. Mr Rourke subsequently had a meeting or meetings with their accountant. Mr Rourke understood the partners in the restaurant business to be Ahmed and Sarwar.
16. By letter dated 10/3/04, Mr Rourke informed the Appellants' solicitors that the purchasers would be continuing the Lease and Sub-Lease after settlement. They did not, however, do so and before settlement took place, Mr Rourke had received instructions, almost certainly before 10/3/04, to prepare a Renunciation of the Lease. He did not inform the Appellants' solicitors.
17. On or about 31/3/04 a Disposition of the Property was duly granted and delivered in exchange for the purchase price. No VAT on the purchase price was, at the time, demanded by, or offered or paid to the Appellants. The disponees were Ahmed and Sarwar as individuals and not as trustees for any partnership. This accorded with the missives.
18. On or about 1/4/04, the head tenants, Nasir Mahmud and Assad Rasul, renounced their interest in the Lease. The Renunciation is described in Mr Rourke's letter dated 28/11/06 to HMRC as "dated 11 March 2004 confirming the effective date and (sic) entry to the Landlords on 1 April 2004". The Sub-lease fell and Ahmed and Sarwar became owner/occupiers.
19. Manzoor Ahmed and possibly others carried on business of an Indian restaurant at the Property before the purchase on or about 31^st March 2004 and carried on that same business immediately after the purchase. The Appellants have never carried on business as an Indian restaurant at the Property.
20. In June 2006, an officer of HMRC (Mr O'Pray) visited the Appellant's premises. One of the matters raised was the sale of the Property. In a follow up letter dated 29^th June 2006, he pointed out that the conditions for a transfer of a going concern were not met. He observed that the option to tax submitted by the purchasers' solicitors had not been processed as it was invalid having been signed by the agent and not the principal. VAT was therefore due on the sale proceeds. The Appellants co-operated fully and openly with the officer and provided all information requested.
21. On or about 19/10/06, HMRC issued a Notice of Assessment in the sum of £50,944.00 plus interest of £8717.40 (total £59,661.40).
22. The Appellants requested reconsideration. By letter dated 6/3/07, the Appeals and Reconsiderations Officer came to the same view.
23. The purchasers do not carry on a property letting business. They did not do so at or immediately after the date of completion of their purchase of the Property. Their purchase concerned their own internal financial arrangements for the ownership and operation of the restaurant business being carried on there. That restaurant business was not being carried on by the Appellants. They did not sell any business to the purchasers. The purchasers did not acquire or carry on any business being carried on by the Appellants.
24. At some point following the issue of the Notice of Assessment the Appellants raised an action at Elgin Sheriff Court against the purchasers for payment of VAT on the purchase price on the transaction. The action is still pending.

Submissions

25. Miss Strachan addressed us on the statutory provisions discussed above and referred to Zita Modes Sari v Administration de L'Enregistrement,^[1] Winterhur Swiss Insurance Company,^[2] and Abdurrahman Tezgel (t/a Master Chef).^[3] She submitted that there were four separate reasons why the appeal should be dismissed. The first was that the Appellants had failed to show that the property letting business was being carried on by the purchasers.
26. The second reason was the purchasers, the two individuals Ahmed and Sarwar, were not registered as taxable persons for the purposes of VAT.
27. The third reason was that Article 5(2) of the 1995 Order required the option to tax to be in place at the relevant time. It was not.
28. The fourth reason was that there was no evidence that any part of the Appellants' business was being transferred.
29. Mr Griffin reviewed the history of ownership of the premises. He submitted that the issue was whether the directors of the Appellants believed the property in question was being sold as a going concern. He attacked the credibility and reliability of the evidence given by Ahmed and Rourke. He criticised HMRC for failing properly to reply to Rourke's letter dated 24/2/04. He said that if he had known the true position about registration he would not have settled the transaction. He generally complained bitterly that he had been deceived by the purchasers and their solicitor and let down by his own advisers, all causing his company a very great deal of expense which he will have considerable difficulty in recovering.

Discussion

30. We found Mr Griffin to be credible and generally reliable. We were less impressed with the reliability of Manzoor Ahmed. Our general impression of his demeanour was that he said whatever he thought the questioner wanted him to say. He described his business as the Al Bahar Restaurant. He said the business had been registered since 2001. However the only documentary evidence of registration before us dates from 2003. He said that he intended to enter into a partnership to buy the Property. The Property was not bought by a partnership. We also observe that the Sub-Lease in Ahmed's favour although short is not well drafted. The narrative begins "The Landlord hereby sub-let to the tenant". The tenant is not a defined word although it is used elsewhere in the deed. Manzoor Ahmed is described as "the sub-tenant".
31. We had the impression that Mr Rourke felt somewhat uncomfortable about the whole transaction and its aftermath. The evidence about the Renunciation was brought out in what was effectively cross-examination by Mr Griffin, and is in stark contrast to the terms of Mr Rourke's letter dated 10/3/04. He stated that the VAT on the purchase price would be consigned pending the outcome of the sheriff court action.
32. Although the Disposition of the subjects was not before us it was reasonably clear from Mr Rourke's evidence that the title was taken in the name of Messrs Ahmed and Sarwar as individuals and not as trustees of any firm of which they might be or were the partners. This accords with those parts of the missives which were produced. Moreover, although no Renunciation was produced Mr Rourke was quite clear that it was prepared and carried into effect.
33. While we have very great sympathy for Mr Griffin and his company, this appeal must be dismissed largely for the reasons advanced by Miss Strachan. Zita Modes at paragraphs 40-46 set out the guiding principles. Winterhur was cited for the proposition, which we accept, that in considering whether a transaction is a transfer of a business one has regard to substance rather than form and to the whole circumstances in order to ascertain whether the effect of the transaction was to put the transferee in possession of a going concern the activities of which he could carry on without interruption.
34. Tezgel (a restaurant case) emphasises the requirement that the buyer carry on the same kind of business as the transferor (paragraph 15). We also note the reference to the additional price clause and its fiscal consequences. This case was perhaps cited because of its superficial similarity to the present appeal.
35. Here, the business carried on by the Appellants as sellers (property letting) was entirely different from the business intended to be carried on and carried on by the purchasers (an Indian restaurant). The Appellants were not transferring their business or any part of it but simply selling an asset. Neither of the purchasers was or is, so far as we are aware, registered for the purposes of VAT. Even if they were, that would not matter in this case. The exercise of the option to tax was made by or on behalf of Messrs Ahmed and Sarwar as partners of an entity in relation to which neither was registered as a partner for the purposes of VAT.
36. In these circumstances, the substance of the transaction was that holder of heritable property as an investment sold it to a purchaser who intended to carry on or continue to carry on business there as an Indian restaurant. The relevant conditions necessary to take advantage of the transfer of a going concern provisions have not been met.
37. Ironically, this may be a better result for the Appellants because it may enable them to recover some of the expense they have incurred in relation to what should have been a straightforward conveyancing transaction in which the elementary VAT aspect ought to have been dealt with by the professionals involved in a way which would have protected the financial interests of the Appellants, and the purchasers.
38. The letter dated 29^th June 2006, failing which the Notice of Assessment constitutes a decision by HMRC that the sale attracted VAT within the meaning of the clause in the missives referred to above. The contractual provision upon which the purchasers' obligation to make payment of VAT to the Appellants appears to have been purified and liability on the purchasers' part established. The decision of this Tribunal one way or another has no bearing on that contractual liability as liability appears to be dependent on the decision of HMRC and not this Tribunal on appeal.
39. The Appellants have sued the purchasers in the local Sheriff Court for the VAT for which they appear to be liable. We have not seen the pleadings. However, subject to any time bar issue (which on a proper construction of the missives may not be well founded) we have difficulty in seeing how the Appellants' action can justifiably be defended. We recognise that this is a matter for the court, not this Tribunal, to resolve with the benefit of the full missives.
J GORDON REID, QC., F.C.I.ARB., CHAIRMAN
RELEASE: 10 JUNE 2008

EDN/07/97

Note 1   2004 2 CMLR 24    [Back]

Note 2   LON/03/0827 Chairman Dr J Avery Jones    [Back]

Note 3   LON/2006/1081 Chairman Howard M Nowlan    [Back]